Two significant updates have occurred regarding the Securities and Exchange Commission‟s (“SEC”) Conflict Minerals Rule (the “Rule”) that are intended to provide some clarity to issuers preparing to file their first conflict minerals disclosures by the upcoming June 2, 2014 deadline. On April 29, 2014, the SEC‟s Division of Corporation Finance (“Division”) issued guidance regarding the effect of the D.C. Circuit‟s recent decision in National Association of Manufacturers v. SEC, No. 13-5252 (D.C. Cir. Apr. 14, 2014). On May 2, 2014, the SEC issued an Order partially staying the effective date for compliance for the portions of the Rule that would require issuers to describe their products as “not been found to be „DRC conflict free‟” pending completion of judicial review.
As we discussed in our April 22, 2014 memorandum, the D.C. Circuit Court‟s decision created uncertainty for issuers preparing to file their conflict minerals disclosures due to the quickly approaching filing deadline and an upcoming en banc court decision in another D.C. Circuit Court case that could affect the outcome of the instant case. To recap, the court upheld a significant portion of the SEC‟s Conflict Minerals Rule (the “Rule”), rejecting arguments that the Rule violates the Administrative Procedure Act (“APA”) and the Securities Exchange Act of 1934. However, the court struck down the provision requiring issuers to describe their products as “not been found to be „DRC conflict free‟” in reports filed with the SEC and posted on issuers‟ websites because it violates the First Amendment.
The SEC‟s Order relies on Section 705 of the APA, which provides that an agency may postpone the effective date of an action taken by it pending judicial review when it finds that “justice so requires.” The Order states that “a stay of those portions of the rule avoids the risk of First Amendment harm pending further proceedings.” The Order provides only for a partial stay because it “furthers the public‟s interest in having issuers comply with the remainder of the rule, which was mandated by Congress in Section 1502 and upheld by the Court of Appeals.”1 The Order additionally directs issuers to refer to the Division‟s April 29, 2014 statement for more detailed guidance regarding compliance.
The Division‟s guidance makes clear that the Division still expects issuers to file any reports required by the Rule on or before the June 2, 2014 deadline. These reports should comply with all portions of the Rule that were upheld by the D.C. Circuit. For instance, issuers that are not required to file a Conflict Minerals Report (“CMR”) should disclose and describe their reasonable country of origin inquiry. Issuers that are required to file a CMR as an exhibit to their Form SD no longer need to identify the products as “DRC conflict undeterminable” or “not found to be „DRC conflict free,‟” but they still must disclose the facilities used to produce the conflict minerals, the country of origin of the minerals, and the efforts undertaken to determine the mine or location of origin of the minerals.
The guidance additionally explains that companies may still voluntarily elect to describe their products using any of the conflict status labels – “DRC conflict free,” “not been found to be „DRC conflict free,‟” or “DRC conflict undeterminable.” However, if an issuer describes any of its products as “DRC conflict free” in its CMR, it must also obtain an independent private sector audit as the Rule requires.
Finally, the Division notes that it will consider whether it needs to provide additional guidance before June 2, 2014.
At the current time, our recommendation remains the same: issuers subject to the Rule should continue preparing any required specialized disclosure filing and submit the filing in a timely manner. We will continue to monitor the situation and provide updates as they occur.